How to Negotiate a Strong OEM Manufacturing Agreement

Your OEM manufacturing agreement is the foundation of your relationship with your vendor. A strong agreement leads to a strong, mutually beneficial partnership. A weak agreement can lead to trouble and conflict.

When you're reviewing and finalizing your manufacturing agreement, don't forget that you do have negotiating power. That's the whole point of the contract - to make sure everyone is happy, not lock you into a bad commitment. 

So, what do you need to specify when drafting your agreement? There are the usual suspects: IP protection, ownership, time frames. 

However, there are less obvious things to consider that can be absolutely crucial. These don't usually come up until there's an issue - so, if you can get them in writing before the problem arises, you'll be prepared for almost anything.

How to Negotiate a Strong Manufacturing Agreement

1.  Inventory Liability

Define responsibility for reporting on inventory status (materials, components, finished product). Part of protecting your supply chain is defining oversight of your product and receiving consistent reports.

2.  Inventory Management

If your manufacturer offers an inventory management program, how will they handle supply and demand? How do they handle buffer stock? Even if you have complete confidence in your vendor, you should have this in writing.

3.  Cost Adjustments Over Time

You, your manufacturer, and the economy are constantly changing. Prices need to reflect the current situation. What's the process for adjusting pricing? What channels does this need to go through? What criteria should it meet?

4.  Repeated, Consistent Product Failures

What do you and your vendor do in the case of repeated failures? Protect your supply chain by specifically addressing the results of manufacturing issues.

5.  Manufacturing Process IP

Manufacturers can and do optimize processes for certain products. So, how is this process handled for you and your vendor if you move to a different supplier?

6.  Account Transfer

Similar to process IP, what and how will product information be available in the case of a transfer between management, engineers, facilities? 

7.  Obligations After Termination of Contract

No relationship has a clean break. There's always something of theirs floating around, division of responsibilities, custodial issues... It's in your best interest to have a plan for these lagging items.

8.  Reverse Supply Chain Management

Consider environmental compliance, recyclability of product, and reconditioning costs. If you're planning on setting up a reverse supply chain, you and your manufacturer need to be on the same page regarding acquisition and reuse.

9.  Shipping & Delivery Management

Sometimes, delivery delays are no one's fault. But they still have consequences for you. What can you and your vendor do to prevent problems in the case of a delayed shipment?

10.  Engineering Costs

Some manufacturers also offer value engineering to help you cut costs and improve efficiencies. How will these services fit into your supply chain? How much will different engineering services cost? Also consider how value engineering will impact overall costs.

Inspired by Arena Solutions' article on manufacturing outsourcing.